Consider an individual firm competing in a market with many other producers. Assume this firm faces a conventional production technology. The short-run production function has a small range of increasing marginal product (increasing marginal returns) and then is subject to the Law of Diminishing Marginal Product (diminishing marginal returns).

• Putting quantityqon the horizontal axis and dollars$on the vertical axis, depict four important curves: Average Fixed Cost (AFC), Average Variable Costs (AVC), Average Total Costs (ATC), and Marginal Cost (MC).
• For this question, assume the individual producers in this industry have no control over prices; theymustaccept the exogenously given price,P₀.On a graph containing the four curvesMC,AFC,AVC, andATC, depict the profit-maximizing output for this firm under the assumption that the exogenously given price ofP₀is sufficiently high to allow the producer to arrive at an optimal output,q₀, that results inpositive profits.
• Graphically indicate the size of the profits for this firm at the exogenously determined price ofP₀.
• Finally, consider a new shock to the market. This new shock has pushed pricesdownto a new level,P₁. Again, the firm cannot change this market-determined price.
• Graphically show this new profit-maximizing outputq₁for this firm given that(a)it hasnegative profitsin this outcomeand(b)it doesnotchoose to shut down. Show and label all relevant curves, priceP₁, and the new equilibrium outputq₁.

(a) Please explain the process you used to determine the optimal outputq₀.

(b) Explain the decision to keep producing in the face of negative profits after the shift fromP₀toP₁.

(c) Finally, now suppose that the firm is subjected to a new Licensing Fee that raises itsfixed costof operation significantly but has no impact on the other costs. What should the firm's response be considering it is still in the short run? (No graph needed). Explain.